What payroll compliance does an Indian employer need: PF, ESI and gratuity?
An Indian employer's payroll compliance covers provident fund (PF) with EPFO, employees' state insurance (ESI) with ESIC where employees are eligible, gratuity under the Payment of Gratuity framework, professional tax where the state levies it, and tax deducted at source on salary. Check current limits on the official portals each year.
Indian central rules as of 31 October 2026. State rules, such as professional tax, differ.
At a glance
- PF: employer and employee each contribute 12 percent of PF wages. The EPFO wage ceiling for mandatory coverage rose from Rs 15,000 to Rs 25,000 a month from 17 September 2026, per the Ministry of Labour.
- ESI: applies to eligible establishments and employees whose wages are within the ESIC limit. Read the current limit and rates on esic.gov.in.
- Gratuity: formula is 15/26 x last drawn basic (plus dearness allowance) x completed years of service. Under the Labour Codes in force since 21 November 2025, fixed-term employees qualify after one year of continuous service.
- Professional tax: set by each state.
- Tax at source on salary: the employer deducts it and files returns.
Monthly payroll checklist
| Task | Owner | Where |
|---|---|---|
| Collect new joiners' UAN, PAN, bank and ESI details | HR | Joining form |
| Calculate PF wages and contributions | Payroll | EPFO rules |
| Pay PF and file the monthly return (ECR) | Payroll | EPFO portal |
| Calculate ESI contribution for eligible staff | Payroll | ESIC portal |
| Deduct professional tax where applicable | Payroll | State portal |
| Deduct TDS on salary and deposit it | Finance | Income Tax Department |
| Issue payslips | HR | Payroll system |
| Record leave, overtime and exits | HR | HR records |
How does gratuity work?
Gratuity is a lump sum an employer pays on leaving after the qualifying service period. The formula is 15/26 x last drawn monthly basic (plus dearness allowance) x completed years of service. For fixed-term employees, the Labour Codes make one year of continuous service the qualifying period. For permanent staff, confirm the qualifying period in the Code on Social Security rules.
Worked example (illustrative). Monthly basic of Rs 40,000. One year of service: 40,000 x 15/26 = Rs 23,077. Multiply by completed years for longer service. Include a gratuity provision in your CTC plan, as in how to hire in India.
Who is covered by what?
Coverage depends on establishment size, wages and state. Do not guess: register on the EPFO and ESIC portals when you cross the threshold, and ask a chartered accountant or labour-law adviser for your case. For employees, see PF and ESI and PF and gratuity.
What mistakes cost the most?
- Missing the monthly PF deposit date.
- Using the wrong PF wage base.
- Not registering new joiners for ESI when eligible.
- Forgetting gratuity provisions when employees leave.
- Not giving payslips.
- Treating employees as contractors. See contract labour.
FAQ
Is PF mandatory for every employee? Mandatory coverage depends on the wage ceiling and establishment. Check the EPFO portal.
Do contractors need PF? Genuine independent contractors are not covered as employees. Contract labour supplied through a contractor has its own rules.
Where can I see the Labour Codes? On the Ministry of Labour and Employment site.
Sources
- Ministry of Labour and Employment, Labour Codes - https://labour.gov.in (accessed 31 October 2026)
- PIB, Government makes the four Labour Codes effective (21 Nov 2025) - https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2192463®=3&lang=2 (accessed 31 October 2026)
- EPFO - https://www.epfindia.gov.in (accessed 31 October 2026)
- ESIC - https://www.esic.gov.in (accessed 31 October 2026)
- Ministry of Labour and Employment, EPFO wage ceiling notice (17 September 2026) - https://www.labour.gov.in/static/uploads/2026/09/4f607a88c5342aeb980c6b999997caab.pdf (accessed 31 October 2026)
This is general information, not legal, tax or immigration advice. Rules change and your situation may differ. Consult a licensed attorney or qualified adviser.